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INTRODUCTION

Nestlé is the world's largest food and nutrition company. Founded and headquartered in Vevey, Switzerland, Nestlé originated in a 1905 merger of the Anglo-Swiss Milk Company, established in 1867 by brothers George Page and Charles Page, and Farine Lactée Henri Nestlé, founded in 1866 by Henri Nestlé. Today, the company operates in 86 countries around the world, and employs over 280,000 people. Nestlé has around 6,000 brands, with a wide range of products across a number of markets, coffee (Nescafé, Nespresso, etc.), bottled water (Buxton, Perrier),milkshakes and other beverages (Nesquik, Milo, Carnation, etc.) chocolate (Milky Bar, After Eight etc), ice cream (Häagen-Dazs, Skinny Cow, etc.),breakfast cereals (Golden Nuggets, Shreddies, etc.), infant foods (now including Gerber products),performance and healthcare nutrition (Nesvita, PowerBar, etc.), seasonings, soups and sauces (Maggi, Buitoni, etc.),frozen and refrigerated foods (Findus, Lean Cuisine, etc.), confectionery (Rowntree products, Caramac, Wonka products, etc.), and pet food (Winalot, Felix). Earnings In 2009, consolidated sales were CHF 107.6 billion and net profit was CHF 10.43 billion. Research and development investment was CHF 2.02 billion.

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Sales by activity breakdown: 27% from drinks, 26% from dairy and food products, 18% from ready-prepared dishes and ready-cooked dishes, 12% from chocolate, 11% from pet products, 6% from pharmaceutical products and 2% from baby milks. Sales by geographic area breakdown: 32% from Europe, 31% from Americas (26% from US), 16% from Asia, 21% from rest of the world.

2 .a as it’s a food industry process costing is appropriate for this industry Five Steps in Process Costing Step 1: Summarize the flow of physical units of output. Step 2: Compute output in terms of equivalent units. Step 3: Compute equivalent unit costs. Step 4: Summarize total costs to account for. Step 5: Assign total costs to units completed and to units in ending work in process inventory.

Process Costing is a topic which is viewed by many candidates with trepidation and, quite often, despair as they plough their way through numerous calculations in the hope that their final process accounts will balance. Terms such as “abnormal losses”, “work in progress” and “equivalent units” frequently bemuse candidates, resulting in panic and a reluctance to even attempt any question set on this topic. This article, relevant to paper B2, is designed to show candidates how to approach a Process Costing question by working through a detailed example, including such difficulties as how to treat losses and the calculation of equivalent units. Definitions Before looking at the worked example you should refer to the study manuals to familiarise yourself with the definitions of the key terms including Opening and Closing Work In Progress (WIP), Normal and Abnormal Losses, Scrap Value and Equivalent Units. A detailed worked example

Closing WIP in Process 1 is 100% complete with regard to Material and 50% complete for Labour and Overheads. Candidates should always strive to present their solutions as neatly and methodically as possible. Closing WIP in Process 2 is 50% complete with regard to Labour and Overheads. Opening WIP is 60% complete with regard to Labour and Overheads.750 Closing WIP 5. as Process 2 cannot be completed until we know the value of the items transferred into this process from Process 1. Figure 1 Jammy Ltd is a manufacturing organisation with two processes. Step 1 The best way to approach this question is to concentrate on Process 1 first.950 Abnormal Loss 44.650 Normal Loss 12. This will make it clear as to which items have to be calculated — these items are numbered in this example for illustrative purposes.000 — — 1. Step 2 The next step is to draw up an Equivalent Units Statement to determine the cost per unit of the equivalent “whole” units produced. paying particular attention to presentation and calculation.350 700 50 200 50 1.000 (1) NIL (2) (3) (4) £ Units £ The Normal Loss figure is 5% of the 1000kg input.750 £6950 Overheads £5. The first step is to draw up a process account in typical ‘T’ account fashion.The following example illustrates how to approach a Process Costing question. Losses in Process 1 have no scrap value. Losses are deemed to arise at the end of the process. but also to allow themselves to check that they have not missed out a vital step. Prepare the Process Accounts for each process.750 £15 Overhead 700 50 100 850 £5. No cost is assigned to Normal Loss as the cost is absorbed into the "good" units. not only to help the marker follow the calculations. Information for the period ended 31 July 1999 is as follows: Process 1Process 2 Opening WIP Nil 200kg Costs for the period: Material 1000kg costing £25. The data for the question is shown in Figure 1.000 25. You should then enter all the information given in the question.650 £27 Labour 700 50 100 850 £12.950 £7 . Equivalent Units Statement Material Units transferred to Process 2 Abnormal Loss Closing WIP 700 50 200 950 Period Costs (b) Cost per unit (b)/(a) £25. whilst losses in Process 2 can be sold for £10 per kg.650 Nil Labour £12. Each side of the account should have a column for ‘Units’ and a column for ‘£’.950 £3475 Transferred to Process 2 700kg — Transferred to Finished Goods— 800kg Closing WIP 200kg 150kg Normal losses are expected to be 5% of input for each process. Process 1 Account Units Current costs: Transferred to Process 2 Material Labour Overheads 1. Abnormal Loss is the difference between the total units on the debit side and the total units on the credit side.

750 Closing WIP 5. .900 750 700 5. Your final Process Account should now look thus: Process 1 Account Units Current costs: Transferred to Process 2 Material Labour Overheads 1.600 2. Step 4 The final step is to complete the Process Account by using the figures calculated in the ‘Total’ column of the Cost Allocation Statement.350 700 50 200 50 34.000 6. You will notice that the total of each column (Material.350 Losses can be sold at £10 per kg.900 1.000 44.500 750 1.475 Closing WIP 57.350 5.950 Total 34. Construct Process Account: Process 2 Account Units Opening WIP Transferred from Process 1 Labour Overheads 700 — — 1.450 (3) 7.950 3.750 4. which is equivalent to 200 x 50% = 100 “complete” units.000 — — 1.000 (5) (6) 300 £ 13. This gives us £18.650 Normal Loss 12.Closing WIP is 50% complete for Labour and Overheads. The Labour Cost of Abnormal Loss is calculated by multiplying the Labour Unit Cost (£15) by the equivalent units of Abnormal Loss in respect of Labour (50).300 Normal Loss 800 50 (4) 500 Units £ 25.300 (1) 2.650 Labour Overhead 10.900.450 £ Units £ 1.000 Step 5 We are now in the position to go through the whole “process” again for Process 2. and so on.950 Abnormal Loss 44.000 Transferred to Finished Goods 34. For example.600 (2) 44.725 150 1.400 25.500 12.300 NIL 7. Step 3 The information calculated in the Equivalent Units Statement is then used to construct a Cost Allocation Statement. This gives us £750.900) is calculated by multiplying the Material Unit Cost (£27) by the equivalent units transferred to Process 2 in respect of Material (700). the Material Cost of Units transferred to Process 2 (£18. Those figures labelled (1) – (3) are the figures to be slotted into the spaces similarly numbered in the Process Account in Step 1. Material Units transferred to Process 2 Abnormal Loss Closing WIP 18. The main differences between the two processes are the existence of Opening WIP and scrap value of losses in Process 2. therefore Normal Loss is assigned a monetary value of 50 x £10 = £500.350 Each entry in the above statement is calculated using the cost per unit calculated in the Equivalent Units Statement and the relevant equivalent units. Labour and Overhead) is the same as the figures appearing in the Process Account for each of these costs. Explanations for the figures in Process 2 are only given where the concepts have not been explained already in Process 1. The layout of this statement is exactly the same as the Equivalent Units Statement.

475 Total 1.950 £10 120 500 75 695 £3.950 600 2.300 500 Units £ 1.000 57. Step 7 Construct Cost Allocation Statement: Cost Allocation Statement Transferred Costs from Process 1 Opening WIP Units started and Completed Closing WIP NIL 26.925 (5) 44. The cost of units transferred includes 3 elements: the cost of Opening WIP brought forward from the previous period (£13.500).725 Summary Process Costing is best tackled with a methodical approach. it will help if workings are .225 (*) The calculation of the cost of units transferred to Finished Goods is slightly different when there is Opening WIP.000 6. Units started and completed during the period is the difference between the units transferred to finished goods (shown in the Process Account as 800) and the units already started at the beginning of the period (Opening WIP of 300). This gives us a total of £48300 to be slotted into the Process Account.300 Normal Loss 800 50 48.800 (*) 33.000 Transferred to Finished Goods 34.500 (*) 8.500 375 3. The period cost given for “Transferred Costs from Process 1” has been calculated by deducting the scrap value of Normal Loss (£500) from the total transferred cost (£34. therefore only 40% remains to be completed in this period.000 7.925 300 £ 13. Step 8 Complete the Process Account: Process 2 Account Units Opening WIP Transferred from Process 1 Labour Overheads 700 — — 1.800 33.950 3.475 Closing WIP 57.000). Given the number of calculations involved.800) and the cost of the units started and completed in this period (£33.Step 6 Construct Equivalent Units Statement: Equivalent Units Statement Transferred Costs from Process 1 Opening WIP Units started and Completed Closing WIP Total Equiv Units Period Costs Cost per unit NIL 500 150 650 £33. Opening WIP in respect of “Transferred Costs from Process 1” are always NIL as they were transferred in a previous period and therefore do not form part of the cost of the units transferred from Process 1 in this period.200 5.475 £5 Opening WIP is already 60% complete with regard to Labour and Overheads.800 Labour Overhead 1.725 150 8. Equivalent units completed in this period are therefore 300 x 40% = 120kg.800 £52 Labour Overhead 120 500 75 695 £6.000 750 6.300). the cost to complete the Opening WIP in this period (£1.

Try to get into the habit of following a particular approach and layout.presented neatly. but is very useful in the respect that it tackles all the calculations in a logical order. Work through the example again without looking at the solution — it is the best way of testing whether you understand the concepts. The approach given above is by no means the only way of tackling process costing. rather than trying to confuse yourself with different methods of presentation and calculation. Good luck! .